Working Paper: NBER ID: w24778
Authors: Richard T. Thakor; Robert C. Merton
Abstract: We develop a theory of trust in lending, distinguishing between trust and reputation, and use it to analyze the competitive interactions between banks and non-bank lenders (fintech firms). Trust enables lenders to have assured access to financing, whereas a loss of investor trust makes this access conditional on market conditions and lender reputation. Banks endogenously have stronger incentives to maintain trust. When borrower defaults erode trust in lenders, banks are able to survive the erosion of trust when fintech lenders do not. Trust is also asymmetric in nature—it is more difficult to gain it than to lose it.
Keywords: trust; lending; banks; fintech; credit market
JEL Codes: E44; E51; E52; G21; G23; G28; H12; H81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trust (G21) | Lender's ability to raise financing (G21) |
| Trust (G21) | Financing costs (G32) |
| Loss of trust (Z13) | Financing costs (G32) |
| Loss of trust (Z13) | Funding difficulties for lenders (G21) |
| Trust erosion due to defaults (Z13) | Financing costs (G32) |
| Trust (G21) | Lender reputation (G21) |
| Lender reputation (G21) | Ability to raise financing (G32) |
| Market conditions (D49) | Trust (G21) |
| Trust dynamics (L14) | Lender behavior (G21) |